Tuesday, 31 July 2012

Capitalism Neutered

Here's a reflection of the state of British business in 2012. As part of a barrage of favourable coverage of Centrica (8 pieces in 3 days), the ever-reliable Telegraph faithfully copies out a press release announcing:

Centrica and GDF Suez are to develop a major North Sea gas field, creating up to 4,000 jobs, after the Treasury handed them a tax break... The companies will invest £1.4bn in developing the Cygnus field, about 100 miles off the North Norfolk coast, and said 80pc of that would be spent in the UK. The Government’s new tax allowance will apply to income from shallow-water gas field production, such as the Cygnus field. It will exempt the first £500m of income from a 32pc tax, saving the companies £160m. Centrica, which owns British Gas, said the tax break would “enhance the economics of the Cygnus project”, enabling it to proceed with the development ... Centrica said the allowance would enable it to proceed with the development of the Cygnus project, the largest gas discovery in the Southern North Sea for 25 years.

Cursory research into the Cygnus field reveals that is indeed a biggie - anywhere north of half a trillion cubic feet of gas, maybe 2 TCF. It's in two geological intervals, the Leman and Carboniferous sandstones; in shallow waters; and can be tied back into an existing platform and pipeline system. Most readers won't know the significance of this, so let me assist.

Firstly, 0.5 - 2 TCF makes it one of the largest gas fields ever found in UK waters - absolutely huge. Fields of this size have supported the development of whole new platforms and pipelines to the shore, at times when the price of gas was very much less than today's, and drilling technology was considerably less effective. Fields substantially less than one twentieth of this size have been developed profitably when they can piggy-back on existing infrastructure like this one can. The Leman sandstones are very productive and contain gas of excellent quality. The Carboniferous can be a bit more problematic, often with relatively high CO2 content, but the existing infrastructure that Cygnus will be utilising was designed to cope with it. And shallow water naturally makes for easy drilling etc. So on every count, Cygnus is going to be Very Profitable Indeed.

In other words, we can be 100% confident that developing Cygnus is a complete no-brainer for Centrica and GDF, and requires no tax break of any kind. It is nice of Centrica to say that Osborne's largesse will “enhance the economics of the Cygnus project” - well of course ! - but to pretend that this is what allows the development to proceed is grotesque.

But hey, this is business in 2012. You stomp down to Whitehall and announce that you will hold your breath until you go blue in the face, unless someone bungs you a sub. The civil service, always a sucker for a bit of special pleading, assures the childlike minister that a sub is indeed called for: it is promptly trousered and the company gets on with what it was always going to do anyway. Centrica has form; but everyone is learning the game, and of course the nukes and renewables are even worse offenders. The corporate version of the dependency culture, with a similarly debilitating long-term effect.

This, I suppose, is what you get when ministers have absolutely no real-life experience whatever. Osborne, we know about; and as for energy minister Ed Davey: As a teenager he worked at Pork Farms pork pie factory and at Boots. In 1989, he became an economics researcher for the Liberal Democrats.

A touch reminiscent of politics in India, where today they have near a tenth of the world's population without leccy today? According to the WSJ journal since 2006, China has added roughly six times more power than India to its national grid each year. India has immense potential, but is blowing it seemingly due to the political system mainly. Read somewhere that over half of Chinese senior politicians/communists have an engineering/science background. How many of ours? Makes you wonder.

I've got one for you ND, albeit on a much smaller scale. The OFT have published a 'market study' non mains fuel and are boasting that 'the biggest' supplier of kerosene to homes has agreed not to change the price the consumer pays between accepting the order and delivery. Press release here:

http://www.oft.gov.uk/news-and-updates/press/2012/64-12

This means that trading standards will now go around telling SME traders it is illegal for them not to sell kerosene to consumers on a forward contract. The market study also points out EU environmental law has changed the specification for domestic kerosene (less sulphur) so that it is now illegal to delivery jet kerosene to consumers to use in their homes. This means there is no liquid financial/futures market for domestic kerosene.

So, do you reckon, is this likely to:

a) shaft small businesses that sell kerosene to consumers, who can't take the risk of selling kerosene they haven't already purchased?

"The civil service, always a sucker for a bit of special pleading ..."

Very much so. That the civil service can snatch defeat from the jaws of victory so consistently, as for example it has done in negotiations with the EU, is a wonder to behold. It is an inbred culture of defeatism and incompetence that will help destroy this country.

@Budgie, this LIBOR imbroglio looks to have kicked Augustus O'Donnell, he of Iraq war fame 'nothing to do with me, I only work here' into first refusal for the gig of Guv'nor of the Bank of England - whey hey hey, what could possibly go wrong?

Or, probably, the greater question would be what could possibly go right? A man so complicit in our current omnishambles that he had both the authority and seniority to clean his fingerprints off everything. Craig Murray's been on the lad's case for a good few years and paints a fairly daming picture of a vain glorious pathetic greaser. Can write off the next 4 years to covering arses rather than tax payer value for money. Now where did I put my bunting....

Steven, I've now read the stuff you linked to: and I don't see it quite as dramatically as you

"ensuring prices quoted at order remain fixed until delivery"

most commodity markets are such that customers can opt for floating price or fixed - this seems simply to force the supplier to offer fixed where previously they didn't, which doesn't seem very extreme

if it forces more suppliers into the market for hedges, supply of hedges is likely to rise, that's the usual way of things

even if not, last time I was involved the wholesale price of domestic kero was ultra-highly correlated with that of jet fuel, for which there is a liquid market: so using jet futures as a hedge for dom kero should be a pretty good 'dirty hedge' with minimal basis-risk

Jan - there is usually a pretty annoying lag, I'll grant you: but, watch or developments

last time around (GlobalRecession1, 2009) there was a distinct wholesale-market price fall and it did work its way through